The Hedge Fund Experience - Good, Bad, Ugly

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Since there aren't any decent/active discussions on the HF forum, I figure I start a thread highlighting the good, bad, and ugly aspects of working at a hedge fund. This is based on my personal experiences so don't take them as gospel.

Hopefully others will contribute with their own experiences over time to add more color to the discussion. It is my hope that those getting into this game will have a better understanding of what they are getting themselves into.

Before I get started, this thread is really intended for people already in finance (current banking analysts/buyside professionals) as a way to start an honest discussion about HF. I'm not going to answer "I'm an undergrad looking to break into hf" type questions in this thread. If I'm in a good mood, I'll start a separate "You're an undergrad and want to break into buyside...this is what you can do" thread later.

This initial post isn't comprehensive and I'll add more over time. There are plenty of thoughts I have on the subject.

Background:

Work as an analyst at a multi-billion dollar fundamental hedge fund, and have been here 3+ years. I work in the special situations/event driven equities group, and specialize in long positions.

1. Be happy with the fund's/group's strategy because you will get pegged. Some of you with restructuring/hy experience are already pegged before you even step foot at a hedge fund ("Jeez these recruiters are only calling me about distressed opportunities"). I would very much like to do distressed debt, short equities, and dabble in foreign securities, but those opportunities are limited for me since I don't have enough experience shorting/analyzing credit/foreign companies.

2. Movement between funds can be very hard. Buyside is great, but it's really not easy to move around. Over time, you're going to be very particular with what you want to do, and the funds are going to be very particular with who they want to hire. Trying to find a fund that matches your preferred strategy, salary, location, culture, and career trajectory is a HUGE task. Most funds don't like paying recruiters so opportunities are usually found through the network. This is why when people move it is usually the result of a senior member branching out and taking junior people with them or networking with a past co-worker. B-school is also another avenue used to move to another fund.

3. Most new hires (ex-IB analyst) are initially hired to grind out models and help "flesh out an investment thesis" (i.e. read the footnotes) for senior guys. You become really valuable when you start to develop an investment identity and begin sourcing ideas. Keep in mind, some places don't care about developing your idea generation abilities and you're only there to grind through the numbers. Obviously places like Tiger were hedge fund manager factories, because analysts were trained to source ideas and defend their thesis. Hopefully, your buyside opportunity is with a place like Tiger.

4. Pay is volatile. You can be doing to same task at different funds and be paid vastly different amounts. Obviously pay at most places are based on fund performance, so be comfortable with knowing your financial well being is heavily reliant on the skills of your PM. As I reach an inflection point in my career, I'm starting to yearn for a situation where I can play a bigger role in killing what I eat and not be so tied to decisions beyond my control/recommendation.

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5. I know what I know and I know what I don't know. I think IB encourages a certain level of BS when you don't know the answer (shit they almost encourage it during the interviews when they gauge who can work with/around random questions), and that's a habit that is quickly squashed in buyside (at least at the good places). You have to be comfortable with what you don't know and still be able to make a thoughtful decision.

I'll be the first to tell you I don't know all the finance textbook lingo, and couldn't tell you the first thing on delevering beta. I know it conceptually, but I rarely apply this stuff on the job.

This business really comes down to identifying what drives value, why the market doesn't reflect this value, and what needs to happen to close the gap.

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Strongly, strongly agree with 1) and 2). Current bankers, take very careful note of 1) and what that means for your career.

I disagree with 3). I think there are quite a few firms which hire you to do the grunt work but I think the implicit expectation is that you will proactively develop your own investment theses and approach and proactively "prove" it. I know there are some firms that more actively encourage this but I think it's more a matter of degree of leading the horse to water.

Also, I would add that recruiters for hedge funds are a mixed bag. Best case, they will be relatively honest (note the caveat of relatively) and have a good understanding of the specific fund and the general strategy. Worst case, they will completely BS you and have little to no idea of the specific fund and the general strategy. If a recruiter describes a fund as "quant" without being able to give many more details, it's usually a strong sign that the recruiter doesn't know shit.

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I disagree with 3). I think there are quite a few firms which hire you to do the grunt work but I think the implicit expectation is that you will proactively develop your own investment theses and approach and proactively "prove" it. I know there are some firms that more actively encourage this but I think it's more a matter of degree of leading the horse to water.

I think a lot of funds are much more "top down" than people realize. Call it whatever you want...collaborative, team driven, militaristic, but I think one of the most important questions to ask a fund is how your work-flow/responsibilities change over time as you move up and how the buy process works.

I agree there will be opportunities to test your ideas at any fund, but there are few places where you're being groomed to be a lone wolf operator/analyst/pm. You'll get to bounce ideas off your superior but at the end of the day they have the last call. After all, you were hired to help support seniors develop their thesis. PMs can be territorial people...

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Would you say that the PE skill set lends itself to fundamental long/short,event driven equity HFs? I assume it does as the valuation work and due diligence process are likely very similar but I would like to hear your perspective as you and I have have about the same amount of experience (3.5 yrs) in slightly different buyside shops. Ultimately, I would like to start my own shop with my current MP who comes from a PM/HF ($B+AUM)background and want to ensure that I am developing an appropriate skill set for the job.

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Would you say that the PE skill set lends itself to fundamental long/short,event driven equity HFs? I assume it does as the valuation work and due diligence process are likely very similar but I would like to hear your perspective as you and I have have about the same amount of experience (3.5 yrs) in slightly different buyside shops.

Yes. Any fundamental shop is going to value modeling/valuation skills. It's probably a minimum requirement for most places.

Of course, that answer doesn't help you much. The real question is what else do these funds want to see in addition to the skills learned in PE...and that's the tricky part. Some want raw ability so they can mold you. Others want straight out of the box analysis ability. Regardless, I think as long as you can articulately explain the logic behind your analysis and the potential pitfalls, you're good to go.

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In PE, it seems like #1 comes from a variety of sources but it can depend a lot on the industry network and relationships that are developed and is usually a more senior role. I'm not certain how this works at HF, but I have to believe it's less relationship oriented and perhaps a little less solely a senior role (depending on the firm culture as referenced by OP.)

My favorite part about the job is #2. I like reading about companies and industry research. The company data to work with is obviously better in PE which is one benefit.

In my experience in PE, I spend a lot more time on #3 than I'd like. Although the tasks are important and I think you develop useful project management type skills/experience, I find it a bit boring and repetitive. Correct me if I'm wrong, it seems at a HF you don't really spend any time on #3, unless you're a trader.

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In PE, it seems like #1 comes from a variety of sources but it can depend a lot on the industry network and relationships that are developed and is usually a more senior role. I'm not certain how this works at HF, but I have to believe it's less relationship oriented and perhaps a little less solely a senior role (depending on the firm culture as referenced by OP.)

HF idea generation is all over the place. We've had ideas sourced from WSJ, other funds, quantitative screens. Some will have a specific theme in mind (i.e. consolidating industries) and use that to guide the investment process.

IBPEHFVC:

2) Deciding if investment is good (analysis)

My favorite part about the job is #2. I like reading about companies and industry research. The company data to work with is obviously better in PE which is one benefit.

I would love the amount of data/access PE firms get, but a big part of the fun is sleuthing around and following the mosaic theory. There's a reason why I order my model scenarios: Management Case, Base, Bear, Nightmare.

In my experience in PE, I spend a lot more time on #3 than I'd like. Although the tasks are important and I think you develop useful project management type skills/experience, I find it a bit boring and repetitive. Correct me if I'm wrong, it seems at a HF you don't really spend any time on #3, unless you're a trader.

Does this seem accurate?

Correct. The trader handles #3. Most of my time is spent doing #2. You might spend more time with #3 if you are doing short positions.

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Thoughts on ex- GLG/Tiger/GS guys who launch their own funds? I'd surmise that most can replicate success (see former Tiger analysts), as they already have the experience (to sniff out value) and track record (to raise $$$).

You mentioned prospective analysts would benefit from working at shops where they can develop and defend investment theses. Is it fair to say that one would one get this shot at a smaller fund (<500mm) run by one of the abovementioned dudes? benefits/drawbacks?

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Thoughts on ex- GLG/Tiger/GS guys who launch their own funds? I'd surmise that most can replicate success (see former Tiger analysts), as they already have the experience (to sniff out value) and track record (to raise $$$).

Your opinion is probably as good as mine, but it's probably a good sign that most of these guys got their start with seed money from Tiger.

longredbull:

You mentioned prospective analysts would benefit from working at shops where they can develop and defend investment theses. Is it fair to say that one would one get this shot at a smaller fund (<500mm) run by one of the abovementioned dudes? benefits/drawbacks?

The main benefit with smaller/newer funds is you can sling shot up the value chain if you do well. The main drawback is the fund sucks and you can't land anywhere else when it implodes (you can mitigate this somewhat if you worked at a big fund beforehand).

Real example: There was an analyst that worked at my fund a couple years ago. He could have stayed here and slowly move up the chain (bigger funds tend to be a little more bureaucratic/institutional). Instead, he jumped over to a much smaller fund to take on more responsibility and is now a PM. This is HUGE. Instead of just being another analyst at a big fund, he has a track record of managing a portfolio and a quantifiable track record to hang his hat on. Having PM experience obviously makes him much more valuable. On the flip side, if the small fund failed, he has the experience of being a large fund analyst to land somewhere else.

Most hf professionals go through the same learning curve. Enter the industry with basics (learned from banking, school, etc.) -> Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)

Big/established funds are a great place to learn Step 1. Smaller funds are great for Steps 2 and 3 once you have a good idea of what you want to accomplish. Think of big funds as a workshop to fine tune the fundamentals (and to meet other talented people). Think of small funds as an apprenticeship...the investment approach of your PM will probably end up being the investment approach you use the rest of your career.

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You probably don't expect an actual response to this, but I'm going to give one anyway lol.

Talk about a hard strategy lol. Trying to understand the capital allocation decisions of both governments and companies in the global financial ecosystem to identify a trend worth investing in is REALLY hard. It's also (more often than not) beyond the scope of what most analysts do. I've done a little work in this space given my past international experience and I used to cover financials (see Bronte Capital Blog to get a view of what the macro thinking process looks like)...It's really hard (Did I mention that already? lol)

Even if you've made the right call, the volatility might make you insolvent before your thesis plays out. Think of the "long energy, short financials" strategy that was so popular last year and left a few funds limping after energy cratered...or the irrational tech bubble that caused Tiger to shut down...or seeing the super successful Tontine close...For every Soros/Rogers/Paulson homerun, there are plenty you don't hear about that got wiped out.

A good case study on this approach are the Chandler Brothers. They've made some good calls over time, but they have had to stomach a lot of volatility (think down 30-40%) before their thesis played out. They can get away with that b/c they invest their own money, but a fund with client money would have shut down a long time ago.

Obviously the styles within global macro vary quite a bit (I'm sure the trend following guys are fine in this volatility), but try to make sure you work at one with more internal money that can handle the ups and down (if that's the direction you want to take).

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Not to nitpick, "long energy, short financials" is an equity play :) Depending on the PM's preference and specific thesis, it could have been expressed a number of ways - any and/or combination from long TED spread to long CAD/AUD to long long rates; with varying degrees of leverage, again dependent on the specific thesis, and volatility/performance targets.

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Most hf professionals go through the same learning curve. Enter the industry with basics (learned from banking, school, etc.) -> Step 1. Master the art of valuation/fundamental analysis -> Step 2. Master how to source/defend ideas -> Step 3. Master how to effectively manage a portfolio (knowing when/how much to buy and sell is fucking hard)

What do you think is the best way for someone to master Step 1 on their own, or to at least learn enough to get into a fund post-MBA?

I've spoken with an analyst at a large HF who directed me to do the following:

1. Read as much as possible: news, filings, industry research, investment/strategy books, etc.
2. Develop a one or two really good in depth ideas into full pitches
3. Invest in your PA

I've got no problem with the learn by doing approach, and I like to work independently, but I think it would be helpful to have some guidance and good examples of the kinds of analysis and research activities that would be considered differentiated enough to really be a solid idea.

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What do you think is the best way for someone to master Step 1 on their own, or to at least learn enough to get into a fund post-MBA?

Step 1 is definitely a continual process, and why I like the fundamental value approach to investing. At the end of the day, I have no idea how good my assumptions/valuation/analysis is so I need a decent margin of safety. Anyway, this is what I did to get a good foundation before my hf days...

1. Read Stock Market Genius (by Greenblatt), Margin of Safety (by Klarman), and Distressed Debt Analysis (by Moyer). I also read some of Buffett's old letter. If you don't have time, I recommend you at least read Greenblatt. Reading these books gave me a good base on how to think about investing. Also watch this video:http://merlin.gsb.columbia.edu:8080/ramgen/video1/...

2. Reverse engineer ideas from good investors. I signed up for a guest membership to Value Investors Club and read the research reports submitted by members. There is some very good stuff on that site. I also looked at some of the older recommendations to see how the investment thesis actually played out and tried to understand why or why not an idea panned out.

3. Intern at a fund. This took some hustle on my part, but having this experience was key for my development. I got paid peanuts, but it was worth it in the long run. You should have access to the hf alumni network through the b-school you attend and you should definitely try hard to get a school year internship with one of the local funds.

IBPEHFVC:

I've spoken with an analyst at a large HF who directed me to do the following:

1. Read as much as possible: news, filings, industry research, investment/strategy books, etc.
2. Develop a one or two really good in depth ideas into full pitches
3. Invest in your PA

I've got no problem with the learn by doing approach, and I like to work independently, but I think it would be helpful to have some guidance and good examples of the kinds of analysis and research activities that would be considered differentiated enough to really be a solid idea.

Pretty standard advice that I agree with. I'll try to drill down a bit.

1. Reading everything is great, but it's not realistic. We're all busy people. I recommend when reading anything, always think about the potential catalyst that turns a story into an investment idea. That should help you narrow down the things you read. The Michael Price video I linked above shows how he reads a paper. I pretty much follow the same approach.

2. Given my background, I'm biased to event-driven situations. Look to pitch ideas with a catalyst.

3. Best way to see how much conviction you have on an idea is to use your own capital.

Here is a very brief example where #1 leads to #2. (I'll go ahead and use a fun example. The Video Game Industry.)

Consolidating industries tend to catch my attention so when I read that Blizzard and Activision were merging my immediate reaction was to ask myself how the other players might react. EA has an acquisitive history so maybe the 800 pound gorilla will respond with their own moves. I don't like own the consolidator so I start to sniff around and see if there were any good small names to own that might be taken out. This leads me to identify Take-Two Interactive (the makers of Grand Theft Auto). Before you know it, EA announces a hostile bid for Take Two. Boom. Profit.

Fast forward to today and we are seeing another interesting situation brewing in the space. Big media players have begun to take an interest in video game publishers with Time Warner even publicly stating their interest. EA has been battered and is restructuring to focus on its core properties. I love this type of situation. Companies with great core businesses tend to waste the money generated from their cash cow on dumb acquisitions and a bloated cost structure. So when a business like this finally decides to be more disciplined with their capital, they tend to generate outsized returns. On the flip side, if they continue to struggle/waste money, there are strategic buyers out there who would love to own the company (limits the downside risk a bit).

So these are the kind of situations you want to read about and invest in.

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By "penalized", you mean, why does their stock price drop eventually? Generally because the acquisitions are not motivated by good ROC, but through rather ridiculous notions such as "revenue growth", and "mindshare capture". All well and good if you can maintain margins, and actually have opex leverage, but the truth is -- most large CEOs just want the deal rep, and sometimes have comp tied to AUM.

Some companies are selectively acquisitive, so you can't really generalize the "empire building" type. Depends on your understanding of the motives driving the management and board of directors.

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This article probably isn't as relevant today with so many unemployed/qualified candidates looking for work (why would you need to sell any candidate in this market?) and many funds hunkering down, but it did get me thinking about the type of funds currently hiring in this market. Most of you already know that the hiring market is currently nonexistent, but I've come across some openings. The funds that are hiring seem to fall into three categories: The Newbie, The Opportunist, and The Philanthropist.

1. The Newbie

The Newbies are the new funds that were lucky to raise some capital and are building out their bench to take advantage of current market conditions. Newbies can also be new funds/strategies launched by a mega fund. Launching new funds/strategies gives these mega funds an opportunity to hopefully collect performance fees while they get back to high water marks in other funds.

2. The Opportunist

The Opportunist are taking advantage of the talent available on the street and leveraging their winnings (maybe they were up or flat in 2008) to take their fund to the next level.

3. The Philanthropist

The Philanthropist (in reference to a founder's tendency to become philanthropists) are funds that are 100% employee/founder money. They typically have little or no redemption pressure and the funds with fundamental strategies tend to take a longer term view on investments and are willing to invest in talent if it'll be beneficial over the long term.

So what's the common denominator? None have high water mark issues. Unfortunately, most of these situations are found through contacts and word of mouth.

The hiring market seems so scarce because no one is using headhunters (like they use to). The type of funds that are willing to pay headhunter fees are still licking their wounds. Hopefully things will get better with a couple more quarters of positive performance and more AUM to charge fees on lol.

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1) How many ideas do you generate on a monthly / quarterly basis? As in, how many do you pitch, and how many get put on?

Since event driven strategies tend to be characterized as being very thorough and very concentrated, I'm only working on 1-2 ideas at a time. Roughly speaking, in any given month, I'll drill down on 2-3 ideas, pitch 1-2, and 50-75% of pitched ideas are put on.

sdw:

2) How much of the portfolio do you allocate to each idea. 4%, 10%?

Concentrated towards the highest conviction ideas.

sdw:

3) How is comp arranged at your shop? Any connection to the P&L you generated? Is ROIC or IRR a factor at all, or is it mostly PM discretion?

Comp is driven entirely on the fund's performance (not personal P&L).

sdw:

4) What happens in scenarios where some members generate a lot of P&L, and others lose a lot - netting out for no incentive for the fund as a whole.

The winners call the headhunters. The losers call the headhunters after losing their job.

In these types of situations, your comp is (more or less) tied to the ability of your PM to accept/decline the pitches given to them. If you're comfortable with their judgment long-term, you stick around. If you're not, you leave.

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By "penalized", you mean, why does their stock price drop eventually? Generally because the acquisitions are not motivated by good ROC, but through rather ridiculous notions such as "revenue growth", and "mindshare capture". All well and good if you can maintain margins, and actually have opex leverage, but the truth is -- most large CEOs just want the deal rep, and sometimes have comp tied to AUM.

Some companies are selectively acquisitive, so you can't really generalize the "empire building" type. Depends on your understanding of the motives driving the management and board of directors.

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Allocation is up to the PM, so I figure it's primarily number of ideas, cash/cash returns, and IRR. Knowledge of the position, inside/out, obviously.

It's tough. Performance becomes more qualitative than quantitative at a place like this. How do you quantitatively measure knowledge of a position? If you're too pushy, you might be asked to leave since you don't conform (even if you're right).

This type of structure makes it very difficult to leverage into being a PM since there is no IRR to hang your hat on.

This is fine for those entering the industry since it's a good situation to learn. As you move up (and desire a bigger role for yourself), it will be necessary to join a fund that measures you on IRR.

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By "penalized", you mean, why does their stock price drop eventually? Generally because the acquisitions are not motivated by good ROC, but through rather ridiculous notions such as "revenue growth", and "mindshare capture". All well and good if you can maintain margins, and actually have opex leverage, but the truth is -- most large CEOs just want the deal rep, and sometimes have comp tied to AUM.

Some companies are selectively acquisitive, so you can't really generalize the "empire building" type. Depends on your understanding of the motives driving the management and board of directors.

Yep

The market has a tendency to penalize the valuation (i.e. multiple compression, lagging peer performance, etc.) of companies who have an undisciplined approach to their capital allocation strategy.

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1. Read Stock Market Genius (by Greenblatt), Margin of Safety (by Klarman), and Distressed Debt Analysis (by Moyer). I also read some of Buffett's old letter. If you don't have time, I recommend you at least read Greenblatt. Reading these books gave me a good base on how to think about investing. Also watch this video:

Some key take aways from Price video:

"I try to eliminate the noise, figure out the stake, and wait for the market to hand me that stake at 60 cents on the dollar."

"I don't mind style drift if that's where the value is."

"When control of a business is sold, that indicates to me intrinsic value. I don't believe in estimating intrinsic value by discounting a stream of earnings, I think that's much too hard to do. I don't like using basic measures like price-to-book, or multiples of EBITDA, those are awful. You have to go to where there are transactions, and then you have to tear the company apart, and see what they're doing with their cash flows, how capital intensive things are. I love reading the merger proxies, I think it's great discipline. And just like merger proxies, bankruptcy disclosures are great treasure troves of industry data."

"The real way to make money, is what I like to call original sources of information...original sources of information are hard to find, they take some creativity and that's what's fun about the business, getting creative about your information sources. E.g. trade papers, regional newspapers, get reporters on the phone, going to court, stuff like that."

Is the distressed book really worth $80? I've read several value investing books, including Klarman. Those books/video focus mainly on special situations--makes sense w/ your background. I'm not entirely sure I want to do that specific area, although you make it sound interesting. What are the pros/cons of working in this strategy vs. more traditional long/short equity at a HF? Related to that, what are the differences (pros/cons) between these fundamental HF roles and more traditional equity buy-side roles, e.g. Fidelity?

Mr. Pink Money:

2. Reverse engineer ideas from good investors. I signed up for a guest membership to Value Investors Club and read the research reports submitted by members. There is some very good stuff on that site. I also looked at some of the older recommendations to see how the investment thesis actually played out and tried to understand why or why not an idea panned out.

Funny, I've been doing (trying) this for a while now--especially at VIC--it gives me a good sense of investment thought process. However, doing this doesn't help too much with sourcing original information, something that is hard to get creative and think about as a boot-strapper.

Mr. Pink Money:

3. Intern at a fund. This took some hustle on my part, but having this experience was key for my development. I got paid peanuts, but it was worth it in the long run. You should have access to the hf alumni network through the b-school you attend and you should definitely try hard to get a school year internship with one of the local funds.

Good idea. I had thought to concentrate on grades, pitches, and network rather than interning during the school year. What kind of hours and work were you able to do during the school year?

On the recruiting side, do you think most fundamental shops value a top MBA, i.e. think of it as a solid business/investment education as opposed to just another signal for general intelligence/ambition?

Thanks for all your tips/suggestions, you've been tremendously helpful.

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Is the distressed book really worth $80? I've read several value investing books, including Klarman. Those books/video focus mainly on special situations--makes sense w/ your background. I'm not entirely sure I want to do that specific area, although you make it sound interesting. What are the pros/cons of working in this strategy vs. more traditional long/short equity at a HF? Related to that, what are the differences (pros/cons) between these fundamental HF roles and more traditional equity buy-side roles, e.g. Fidelity?

Like it or not, distressed analysis is going to be part of the picture in most investment roles over the next two years. Mutual funds like Fidelity are concerned about marketing and relative performance more than they are about absolute outperformance. This is partially due to the 10% max-cash cap that the SEC imposes on them. Hence, they tend to waste good analysts. However, you might find the one or two good managers within the system who'll put you on the right path.

There's no thing such as "traditional long/short". L/S can describe a manager who blindly pair trades, as well as one who selectively puts on absolute return ideas on both sides of the book. I think the best structure is one where the manager can drift the where the opportunities are --- long/short, equity/debt, all sectors, all countries, derivatives if cheap (taking into account counterparty risk). The limitations should be self-imposed to fit the size of the shop. Too broad can be too scattered.

IBPEHFVC:

Funny, I've been doing (trying) this for a while now--especially at VIC--it gives me a good sense of investment thought process. However, doing this doesn't help too much with sourcing original information, something that is hard to get creative and think about as a boot-strapper.

Some of the best fund managers aren't necessarily "boot strappers". Don't worry about picking up ideas. As long as you glean the thought process, you'll eventually come up with a few ahead of the pack.

IBPEHFVC:

Good idea. I had thought to concentrate on grades, pitches, and network rather than interning during the school year. What kind of hours and work were you able to do during the school year?

On the recruiting side, do you think most fundamental shops value a top MBA, i.e. think of it as a solid business/investment education as opposed to just another signal for general intelligence/ambition?

An MBA is just a signal and a screen. People essentially offload the screening function to HBS/Stanford admissions committees. In terms of hiring, most fundamental value shops will make individual decisions: i.e. is the person easy to work with, intellectually curious, driven beyond the need for money (Dalio has a nice piece on the search for excellence).

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Is the distressed book really worth $80? I've read several value investing books, including Klarman. Those books/video focus mainly on special situations--makes sense w/ your background. I'm not entirely sure I want to do that specific area, although you make it sound interesting. What are the pros/cons of working in this strategy vs. more traditional long/short equity at a HF? Related to that, what are the differences (pros/cons) between these fundamental HF roles and more traditional equity buy-side roles, e.g. Fidelity?

Like it or not, distressed analysis is going to be part of the picture in most investment roles over the next two years. Mutual funds like Fidelity are concerned about marketing and relative performance more than they are about absolute outperformance. This is partially due to the 10% max-cash cap that the SEC imposes on them. Hence, they tend to waste good analysts. However, you might find the one or two good managers within the system who'll put you on the right path.

There's no thing such as "traditional long/short". L/S can describe a manager who blindly pair trades, as well as one who selectively puts on absolute return ideas on both sides of the book. I think the best structure is one where the manager can drift the where the opportunities are --- long/short, equity/debt, all sectors, all countries, derivatives if cheap (taking into account counterparty risk). The limitations should be self-imposed to fit the size of the shop. Too broad can be too scattered.

As mentioned, the bulk of the HF job opportunities (over the near term) will center on a distressed strategy. Moyer's book is required reading at many distressed funds, and will be a book you'll refer back to. It's one of the first books anyone will recommend if you want to learn about restructurings/distressed debt. You don't have to get the book, but it will help.

The best L/S funds I know are event driven. I can't even think of a quality L/S that doesn't integrate a catalyst in their investment thesis. As far as mutual funds are concerned, you are handcuffed as an analyst. You'll have strict rules on how you can allocate money, the size, the industries, etc. Overall mutual funds are a pain in the ass. Marketing definitely drives these places.

On a side note, I definitely agree the best structure allows a manager to drift a bit. Outside of the Michael Price's and Seth Klarman's of the world, I can't think of many situations where the manager is given that much discretion to drift. If a fund were to try Klarman's approach (which includes holding a lot of cash), most would feel the wrath of investors asking for their money back.

sdw:

IBPEHFVC:

Funny, I've been doing (trying) this for a while now--especially at VIC--it gives me a good sense of investment thought process. However, doing this doesn't help too much with sourcing original information, something that is hard to get creative and think about as a boot-strapper.

Some of the best fund managers aren't necessarily "boot strappers". Don't worry about picking up ideas. As long as you glean the thought process, you'll eventually come up with a few ahead of the pack.

You'll be a good situation once you get the thought process down. Don't try to re-invent the wheel when it comes to sourcing original ideas. Just apply the concepts you've learned to similar situations. Look for announced restructurings, companies with new management, announced spin-offs, busted spin-offs/ipos, etc. You're bound to find an interesting situation.

sdw:

IBPEHFVC:

Good idea. I had thought to concentrate on grades, pitches, and network rather than interning during the school year. What kind of hours and work were you able to do during the school year?

Definitely focus on networking and getting experience. I did 20+ hours of work and did everything from doing comps, to interviewing management, to reading filings, to modeling. The important thing is you get some experience and have a better understanding of what the job is like.

Make sure you bust your butt because that internship will either turn into a full time offer or a VERY IMPORTANT REFERENCE. I got my current gig because I got a glowing recommendation from the fund I interned at.

sdw:

IBPEHFVC:

On the recruiting side, do you think most fundamental shops value a top MBA, i.e. think of it as a solid business/investment education as opposed to just another signal for general intelligence/ambition?

An MBA is just a signal and a screen. People essentially offload the screening function to HBS/Stanford admissions committees. In terms of hiring, most fundamental value shops will make individual decisions: i.e. is the person easy to work with, intellectually curious, driven beyond the need for money (Dalio has a nice piece on the search for excellence).

Agreed. It's just a signal.

Also, attending top schools give you access to alums working at top funds. It removes one less hurdle to get in front of someone. "Student X got my contact from Professor Y, I'm willing to chat with them".

Once you're in the door, the ball is in your court. Impress enough and you just might get hired.

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I always thought b-school is a rather expensive way to put up table stakes.

The main advantage is the network, and there are other ways to build that - regardless of background.

I'd recommend reading some of Dale Carnegie's anecdotes on how people develop themselves. It's much easier (and more fruitful) to build your own list of contacts that rely on the HBS (overcrowded) and Stanford cred.

That being said, it's easier to raise a fund when you can flash credentials. Somehow, that seems to trump track record.

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Funny, I've been doing (trying) this for a while now--especially at VIC--it gives me a good sense of investment thought process. However, doing this doesn't help too much with sourcing original information, something that is hard to get creative and think about as a boot-strapper.

I'm not particularly interested in working on original information. I'm only concerned about focusing on primary information--never secondary information. I want to make my judgment by coming to an unfiltered conclusion. This is where working on your thought process by studying superb investment writeups can help.

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Funny, I've been doing (trying) this for a while now--especially at VIC--it gives me a good sense of investment thought process. However, doing this doesn't help too much with sourcing original information, something that is hard to get creative and think about as a boot-strapper.

I'm not particularly interested in working on original information. I'm only concerned about focusing on primary information--never secondary information. I want to make my judgment by coming to an unfiltered conclusion. This is where working on your thought process by studying superb investment writeups can help.

I agree with your point about coming to unfiltered conclusions through primary information. But I don't view original sources of information as necessarily the same thing as secondary information. For instance, if I'm able to get useful trade-able company/industry data through creative means, then I can get an edge.

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What was your application pitch? General descriptions is fine. No specifics needed.

I've considered applying, but it's tough finding time to pitch an idea that doesn't conflict my fund. I would probably need to pitch debt or a short way outside my current coverage universe.

My application was an asset play of a terrible (really terrible) retailer. The non-operating assets were (truly) conservatively worth more than than the market cap. This was distorted because GAAP reporting requirements required the main non-operating asset, a minority (but significant) ownership position in a private co (sub), to be reported on this company's balance sheet at almost no asset value. On top of that, GAAP required the ownership position to be recorded as a liability due to a recap at the sub level that GAAP forced to be recognized as negative/LBO'd equity. I was able to value the minority position in the sub, because GAAP required this retailer to provide financials for the sub in their 10K.

Even though the recap and accounting treatment had happened years earlier and the sub had public financials, the opportunity was just there. It was pretty easy to figure out if you read the notes and exhibits. It was simple: you got the non-operating assets at a discount to market cap, and you got the bad operating company's book value for free. The beautiful part was that the GAAP reporting requirements just distorted the numbers and would not have made the company come up on *any* screens. I don't use screens. My idea had no catalysts and really was a bad company.

My application was pretty comprehensive in dissecting the line items and showing the economic value of the assets despite the financial reporting. I'd say that it takes a certain type of idea that gets you into VIC or that gets highly rated on there. It seems to be the really quirky, undiscovered idea that gets a nice response. I mean 'undiscovered' to mean not the typical event-driven, hedge fund hotel (e.g., DPS spinoff, EMC stub, etc.), since virtually all members are aware of those and there are thousands of "value-oriented, event-driven/special situation" funds out there who are already on it. You should just look for a really quirky, low TEV/price with a market cap of less than $200mm but more than $50mm. That's where you probably(?) won't be conflicted out at work since you work at a $3B fund. The powers-that-be at VIC (JG) will probably be most receptive to that type of idea. Alternatively, just submit some microcap trading at less than 4x free cash flow and do a good job supporting you free cash flow estimate 1 and 3 years out to defend that multiple.

Just apply. I'm aware that you can reapply as many times as you want; I checked before applying. I got in while I was still in law school and had only worked a summer at a <$10mm fund. I had never worked FT (no banking, no HF, etc.).

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My application was an asset play of a terrible (really terrible) retailer. The non-operating assets were (truly) conservatively worth more than than the market cap. This was distorted because GAAP reporting requirements required the main non-operating asset, a minority (but significant) ownership position in a private co (sub), to be reported on this company's balance sheet at almost no asset value. On top of that, GAAP required the ownership position to be recorded as a liability due to a recap at the sub level that GAAP forced to be recognized as negative/LBO'd equity. I was able to value the minority position in the sub, because GAAP required this retailer to provide financials for the sub in their 10K.

Even though the recap and accounting treatment had happened years earlier and the sub had public financials, the opportunity was just there. It was pretty easy to figure out if you read the notes and exhibits. It was simple: you got the non-operating assets at a discount to market cap, and you got the bad operating company's book value for free. The beautiful part was that the GAAP reporting requirements just distorted the numbers and would not have made the company come up on *any* screens. I don't use screens. My idea had no catalysts and really was a bad company.

Good stuff. The investing hedge fund (if they're willing to take a more activist position to unlock value) would probably be the catalyst in a situation like this.

How did you come across the opportunity? I'm always interested in hearing about other people's investment sourcing process. I've untangled a lot of GAAP financial statements over the years and can't think of many situations where I would come across a gem like this.

Screens are so tough. Most of today's alpha is hidden in the footnotes.

MMmonkey:

I'd say that it takes a certain type of idea that gets you into VIC or that gets highly rated on there. It seems to be the really quirky, undiscovered idea that gets a nice response. I mean 'undiscovered' to mean not the typical event-driven, hedge fund hotel (e.g., DPS spinoff, EMC stub, etc.), since virtually all members are aware of those and there are thousands of "value-oriented, event-driven/special situation" funds out there who are already on it. You should just look for a really quirky, low TEV/price with a market cap of less than $200mm but more than $50mm. Alternatively, just submit some microcap trading at less than 4x free cash flow and do a good job supporting you free cash flow estimate 1 and 3 years out to defend that multiple.

I love quirky value ideas. They're probably the hardest situations to find since (like you mentioned) you can't screen for them. I can't think of an efficient way of finding these type of ideas aside from reading a lot and trying to be cognizant of situations where these type of value plays might be found.

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...I work at a large global macro hedge fund in a pretty senior decision-making role. I think that the day that Mr pink describes is way more laid back then the one I have. Maybe its because he is an analyst and i have responsibility for p&l but my day is much more like this:

5am: Wake Up, log into my systems at home, check what is going on in Europe and what happened while I was asleep in Asia. The moment while I am logging on is one of the scariest of the day because you can get some very bad news about what happened while u slept.
545am: Get to work. Log in and begin reading research both from sell-side research people and from our in-house analysts. Also prepare for for the US markets open by going over any economic data or major earnings that are coming out that day.
until about 5pm: Keep reading, watch markets, make trades where appropriate, discuss markets with sell-side salespeople/analysts, work on analytic tools i use like spreadsheets, etc., order lunch to my desk.
5pm: Leave the office. Make sure you have call levels left for the night guys overseas in case things go haywire.
5-10p: Either go out and do stuff...date/drinx, whatever, go to the gym, or go home, log in and watch Asia open up.
10p-5am: Sleep...sort of...wake up several times either to check markets or because you get calls from brokers overseas who have call levels on positions. Sometimes also if I have a large position in Asia or Europe and major economic data is coming out I'll wake up for that.

...generally if u do global macro it means no sound sleep ever again except friday and saturday nights and a work-week that begins 3pm Sunday and goes to the end of trading in NY Friday totally continuously except for about an hour every day between NY close and Asia open. So thats what you have to look forward to!

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...on strategies...ie global macro vs long-short equity vs others...it all depends on personality and strengths. I have worked as an analyst in fixed income relative value and an intern at an equity shop so i have some broad exposure and I can say that for me i love macro because it is more artistic and less quantitative. That seems cheesy and it is, but i see the global markets as a really big machine that is constantly shifting based on world events and as you get better and learn all the products it becomes very artistic the way the different markets move in step and react to one other. It is like a symphony of different instruments and at any given moment one section is playing louder and one is playing softer but there is reason to it all and you have to learn to get in step with the markets so you can react quickly.

There is large volatiltiy as mentioned, but that is why discpline and position management are so important...that is universal accross strategies. There is a continuing shake-out accross markets not because of volatiltiy but rather because many managers always add to losing trades and express no discpline...true for every strategy.

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Thanks a lot for sharing your insights. I am graduating from college in June and have secured a position at a global macro fund as an "assistant trader," unpaid. I shall be with the fund for 6 months maximum, till I can either get a full-time job (probably in its back office), or as an Analyst with a sell-side shop or some other fund/PE firm on a paid basis. What advice would you have for me as I start my six-month contractual job? It is through an alum who has been very helpful. However, I fear that I would be put to menial tasks and won't be able to learn much, esp. since they're not paying me. Any advice on how I can maximize my returns from the position would be greatly appreciated.

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I've received some inbox questions and I figure I answer them in this thread since most are asking similar questions and there will be others on this forum better equipped to answer some of the questions.

Narrow down the type of funds you want to work at. You might not have many choices if you're in a specialized group/practice (see comments on getting pegged in previous posts), but you should definitely try to figure out what you want to do. Global macro is much different from event driven which is much different from emerging markets, etc. Most HF positions are "career track" in nature so keep that in mind when going into the process. Most managers do not want to hear your interest in working for a couple years before going to business school. Once you have a general idea of what type of fund you want to join, begin networking with colleagues and talking to headhunters. Getting HF interviews is all about networking, hustle, and leaving a great impression. Others please feel free to chime in.

2. How do I prepare for hedge fund interviews? Most of the work that goes on in IBD does not require any form of high level analysis, much less any "value-identifying" exercises. Even modeling (DCF/LBO) does not appear to be that complicated. Most of the bankers that I know have very limited accounting knowledge, while industry bankers are frequently borrowing ideas from the ER department.

This is an issue I've seen several times when interviewing IBD analysts. Many have a good grasp of modeling but have a hard time articulating the levers of value and why they're interested in the fund. Most of your competition is in the same boat and there are a few things you can do to differentiate yourself. I want to see consistency in thought and a sincere interest in doing the job. Funds follow a particular investment strategy/approach and I want to hire people with similar lines of thinking. This is why it is so important to narrow down the type of funds you want to work for. It's easy to identify the candidates who are not truly interested in the fund. They have little idea about the strategy, who the big players are, the history of the founder, the type of situations the fund looks for, and why the fund sees value in doing their particular strategy. You need to know these things going into the interview.

In terms of technical/analytical advice (assuming you're interviewing with a fundamental shop), develop a solid understanding of capital allocation and how those decisions drive valuation. Over the long-term, valuation is very much tied to ROIC so keep that in mind when trying to articulate value. A couple key insights is all it takes to leave a good impression during an interview. You've spent your banking career trying to convince companies why a transaction is a good idea. Now you have to flip a switch and understand why most transactions are generally a bad idea lol.

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I have a few questions for you if you don't mind:
1) What do headhunters/recruiters need to see on your resume before they are willing to forward your resume along to a HF? I have 3 years of IBD experience along with some principal investing experience. However, I don't come for a BB - not sure if it is enough in this environment.

2) I've been reading up a lot on preparing for the interview and the thing that keeps coming up is that you have to have 2-3 ideas that you can talk intelligently about. How do you come up with those? Do you try and focus on a sector and pick a few stocks that look like they are undervalued and research the heck out of them? I read financial statements all the time and sometimes all I can think about are the ratios. Can you suggest a basic system at how to look for undervalued investments? (eg: trading for less than cash value, very poor working capital...etc)

3) How is the HF job market now? Are funds still hiring? You talk about getting stuck (specialize) in a strategy after you join one. I currently see this HF opportunity that requires some stats programming. While I have no problem doing some programming, I'm not sure whether I want to program in the long term.

4) How did you find the type of strategy that you like? Did you not interview for other strategies?

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1) What do headhunters/recruiters need to see on your resume before they are willing to forward your resume along to a HF? I have 3 years of IBD experience along with some principal investing experience. However, I don't come for a BB - not sure if it is enough in this environment.

Depends on what the hiring hedge fund is looking for. When we do a search, the PM will tell the headhunter the type of background we're looking for and they will proceed to give us a resume book full of names that meet that criteria. Most junior positions will generally require some sort of sell-side experience (so we're not training from scratch) and top grades. Some funds will add additional hurdles (i.e. only top ivy grads with M&A experience and experience in the long-short strategy, etc.). Get proactive and start meeting with the headhunters. The hiring environment is pretty dry now, but you might as well lay the groundwork now and (hopefully) leave a good impression. Your profile should be good enough to at least be included in the "fundamental hedge fund" resume pile. The key for you is to make sure you don't get lost in the shuffle so make sure the headhunters can connect a face to your resume.

I would also try to bypass using headhunters altogether and network my way to funds I'm interested in.

ibda:

2) I've been reading up a lot on preparing for the interview and the thing that keeps coming up is that you have to have 2-3 ideas that you can talk intelligently about. How do you come up with those? Do you try and focus on a sector and pick a few stocks that look like they are undervalued and research the heck out of them? I read financial statements all the time and sometimes all I can think about are the ratios. Can you suggest a basic system at how to look for undervalued investments? (eg: trading for less than cash value, very poor working capital...etc)

Tough to say. A lot of my ideas come from reading random articles. It's tough to find home runs using "traditional screens", but they are still helpful. I'll answer this one in depth when I can find some time.

ibda:

3) How is the HF job market now? Are funds still hiring? You talk about getting stuck (specialize) in a strategy after you join one. I currently see this HF opportunity that requires some stats programming. While I have no problem doing some programming, I'm not sure whether I want to program in the long term.

The market is cold. A lot of funds are underwater and it might take a couple quarters of solid performance before they even think about hiring. On the flip side, there are some talented people leaving down funds (i.e. they performed well, but didn't get paid because the funds sucked) to start their own fund. Latch on to a promising start up fund and you just might get sling shot to the moon...or burn up in the atmosphere lol.

It sounds like the role your looking into is very specific to the needs of that particular fund. Is it a quant-esque fund? Stats programming does not sound like a transferable skill (at least for fundamental hf's).

ibda:

4) How did you find the type of strategy that you like? Did you not interview for other strategies?

I read Greenblatt and decided I wanted to be a special situations investor (true story...it was a light bulb eureka moment in my life). Value investing made a lot of sense to me and I saw no need to look into other strategies.

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Which Greenblatt book did you read? The Little Book or Stock Market Genius? I've read all the basic value investing books already (Moyer, Graham & Dodd, Klarman, Buffet's letters) and feel that I am ready to append my new found knowledge to my principal investing experience.

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